Caterpillar and the Farm and Construction Machinery Industry

1. Caterpillar and the Farm and Construction Machinery Industry Mods 1 & 2 Kevin Lenart

2. The Industry • Manufacturing of vehicles and machinery for construction and agriculture • Includes heavy trucks, road paving and earth-moving machines, tractors, bulldozers, locomotives, lawn mowers, and commercial landscaping equipment • Excludes residential gardening equipment and small flat-bed trucks

3. Porter’s Five Forces • Industry Competition • Construction and Mining – high competition and increasing • Farming and Agricultural Machinery – low competition • Top two companies account for 50% of market share • Buyer Power • Mature industries that are low to medium concentrated • High buyer power

4. Porter’s Five Forces (cont.) • Supplier Power • Medium – commodity pricing on a number of inputs, purchasing of finished products like engines give power to supplier • Product Substitutes • Low – substitutes like shovels and manual labor do not compete with machinery

5. Porter’s Five Forces (cont.) • Threat of Entry • Medium – capital intensive industry with fragmented competition • Little government regulation aside from environmental regulations • Incumbent firms have solidified supply chain relationships

6. Industry Financial Performance

7. Industry Life Cycle and Cash Flows • Comparing an industry’s stage in its life cycle to the cash flow signs of the companies within it can be useful in forecasting • Identified as a mature industry but Caterpillar shows cash flow trends of growth

8. Strengths • Strong dealer network and parts support, “enterprise point of view” across the value chain • Vision 2020 plan to incorporate principles, values, and goals of company with stockholders, customers, and employees • Enterprise Product and Technology Strategy • Energy and Power Systems • Machines and Machines Systems • Automation and Enterprise Solutions

9. Weaknesses • Self-described “painful year” in 2013 • Missed Q3 estimates by $0.23/share and decreased 2013’s sales estimates by $1-3 billion and earnings estimates by $1.00/share • Less mining (which could continue into 2014), declined demand for new equipment • Cut jobs, temporarily closed factories

10. Opportunities • Infrastructure development and improvement is an ongoing process in emerging markets and all over the world • Saudi Arabia $25 billion budgeted (Caterpillar project is $171 million) • Increase in availability of natural gas creates a market for companies utilizing it • Recovering housing market • Capitalize on historically low interest rates

11. Threats • As emerging markets grow, so does competition especially from companies local to these economies • Product demand is reliant on economy • Financial performance can be affected by government action, commodity and component pricing, international instability, financial service risks, etc.

12. Caterpillar • “With 2012 sales and revenues of $65.875 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services and Progress Rail Services.” (“Company,” caterpillar.com)

13. Caterpillar (cont.) • Segments • Construction Industries – infrastructure and building construction • Energy and Power Systems – energy solutions and applications • Resource Industries – mining, lumber • Customer and Dealer Support – support, parts, training • Financial Products - financing • 2012 • Ranked 46 on Fortune 500 list • $2.5 billion spent on R&D • Record sales, revenues, profits

14. Operations • Investment in locomotive production during growing demand • Technology Enabled Solutions (TES) Strategy to assist customers • Growing division of mining products • Combined Heat and Power (CHP) technology for cost-efficient and clean energy production

15. Recent News • Caterpillar Group President Stu Levenik testified before the House Transportation and Infrastructure Committee lobbying for infrastructure enhancements • Would increase product demand • UBS Analyst Steven Fisher believes Caterpillar dip will bottom out and turn around in the next 12-24 months • Believes it may be beneficial to get in on the turnaround early but urges investors to be cautious • Caterpillar became the #7 most shorted stock using “days to cover” metric – the number of trading days it would take to cover the number of short positions given average daily volume and assuming every trade would close a short position

16. Recent News (cont.) • Unexpected drastic decrease in demand for mining equipment combined with improved quality of Chinese competitors’ offerings could cause trouble for Caterpillar • Despite 2013 struggles (especially in mining), some analysts believe that the company’s long-term prospects are positive as other segments like construction will carry Caterpillar until the sluggish segments come around • When the struggling segments recover, Caterpillar could surge

17. Sources • "Caterpillar Becomes #7 Most Shorted Dow Stock, Replacing DuPont." The Street. The Street, 13 Jan. 2014. Web. 14 Jan. 2014. • "Caterpillar: Dim Short Term Prospects But Bright Long Term Prospects." Seeking Alpha. Seeking Alpha, 9 Jan. 2014. Web. 14 Jan. 2014. • "Caterpillar Form 10-K." Caterpillar.com. Caterpillar, 19 Feb. 2013. Web. 14 Jan. 2014. • "Caterpillar Group President Urges Congress to Develop Legislation to Enhance Infrastructure in United States." Yahoo Finance. Yahoo!, 14 Jan. 2014. Web. 14 Jan. 2014. • "Company." Caterpillar.com. Caterpillar, 2013. Web. 14 Jan. 2014. • "Construction & Agricultural Machinery Industry Snapshot."NYTimes.com. N.p., 2014. Web. 14 Jan. 2014. • "Fortune 500 2012: Industry: Construction and Farm Machinery." CNNMoney. Cable News Network, 21 May 2012. Web. 14 Jan. 2014. • Hargreaves, Rupert. "Caterpillar Has a Huge Problem on Its Hands." The Motley Fool. Interactive Data Managed Solutions, 12 Jan. 2014. Web. 14 Jan. 2014. • IBISWorld Reports: December 2013 Construction and Mining Equipment Wholesaling in the US, October 2013 Tractors and Agricultural Machinery Manufacturing in the US • Levisohn, Ben. "Caterpillar: Digging for a Bottom." Barron's. Dow Jones & Company, Inc., 13 Jan. 2014. Web. 14 Jan. 2014. • Sharf, Samantha. "Caterpillar Bulldozed By Weak Earnings, Poor Outlook." Forbes. Forbes Magazine, 23 Oct. 2013. Web. 14 Jan. 2014. • Speculations, Great. "Mining Weakness Could Continue To Weigh On Caterpillar's Results In 2014." Forbes. Forbes Magazine, 27 Dec. 2013. Web. 14 Jan. 2014.